Budget: It just keeps getting harder to balance state books
It has gotten progressively tougher to balance the state’s books — as budgets in the past few years have routinely revealed.
This year will be no exception.
The budget that Finance Minister Tito Mboweni will deliver on Wednesday is expected to be a near impossible juggling act, given the stark realities he had already laid out in the October medium term budget policy statement (MTBPS). Since then the economic outlook has, if anything, worsened and adding to the already bleak picture is the Eskom crisis.
Classed as “too big to fail” the pressure to deliver on a credible Eskom rescue package blots out just about everything else.
The level of detail on the package that will emerge from the budget, remains to be seen.
Government’s financial room to manoeuvre however, is simply not there. Tax revenues are expected to miss targets according to economists. The state is severely limited with regard to how much more money it can borrow. It is also an election year, so measures that could well raise more cash but that will alienate voters (like another hike in value-added tax) are unlikely.
“This is something that is going to make an already tough environment even tougher,” said Maarten Ackerman, chief economist at Citadel, a wealth management firm.
There is immense pressure to balance generating economic growth, with the social welfare aspects of the budget — particularly as it is an election year, Ackerman said.
“So adding Eskom to that is a major hurdle,” he added.
It was revealed in Parliament last week that, on its current trajectory, Eskom will run out of money in April. The company has proposed that at least R100-billion of its debt be shifted to the state’s balance sheet — which it expected to increase the share of the country’s debt as a percentage of gross domestic product (GDP) by 2%. But letting the company fail is not an option as the intense round of load shedding during last week again brought home.
According to Ackerman, given the already tight fiscal framework that Mboweni laid out in the MTBPS, budget reprioritisation and reallocation is likely to be a key focus of Wednesday’s announcement.
The bailout for Eskom will “be the key to the budget” according to Peter Attard Montalto, head of capital markets research at Intellidex. It was likely that an announcement on both the form and quantum of the bailout would be made — most likely that of a debt transfer and an equity injection. But he warned, it is possible that only the form or policy position is announced on Wednesday and not the amount, which would significantly disappoint markets.
The prognosis was a bleak before Eskom switched the lights off.
Mboweni’s October MTBPS, was a grim reality check for South Africa. The national treasury slashed its economic growth forecasts from the 1.5% announced in the February 2018 budget, to a much weaker 0.7%. The estimate of the budget deficit meanwhile rose to 4% of GDP. To service this deficit, state debt was forecast to rise to 55.8% of GDP for 2018/19, rising to 58.5% of GDP by 2021/22.
Despite increases in the VAT rate announced in the 2018 budget, revenue collection estimates at the time, showed a shortfall of R27.4-billion in 2018/19, R24.7-billion in 2019/20 and R33-billion in 2020/21.
There is some expectation from economists that tax revenues are going to remain under pressure. According to Sanisha Packirisamy, economist at Momentum Investments, growth in overall tax revenues for the first 9 months of the 2018/19 financial year has reached 7.6% - below national treasury’s target of 8.3%.
“This will require stronger departmental revenue growth to maintain the budget deficit targets, which were planned in October 2018,” she said in a pre-budget report.
Expectations for corporate tax collections are likely to disappoint she noted. According to data from the South African Reserve Bank, real growth in corporate operating surplus averaged 2.2% for the second and third quarter of 2018 which is below the longer-term average of 4.1%.
Although personal income tax (PIT) increases are unlikely, the government can still increase revenue by not fully adjusting tax brackets to offset the increase in worker wages caused by inflation — commonly known as bracket creep. This “stealth tax on consumers” has been a key contributor to PIT revenue in the past years, Packirisamy said.
While consumers are not likely to see direct taxes increased – indirect taxes may be hiked notably the road accident fund levy – which is one of the taxes levied on the fuel price. The levy was hiked by 30c in 2018 but given the rising liabilities of the fund, further hikes are in the offing, she said. It is also likely that there will be increases to “sin taxes’ on alcohol and tobacco products, Packirisamy added.